Income Replacement Insurance (PHI)

Sunday, 9th May 2010 14:17 - by Resident IFA

Today, I could be mostly stating the obvious! (Credit to The Fast Show) Income Replacement Insurance aka Permanent Health Insurance (PHI) aka Income Protection...whatever term you use, this is vital personal protection. Before I make the point I intend, let’s look at what PHI does. It provides a replacement income after a deferred (waiting) period of 1, 3, 6, or 12 months if you become unable to work due to sickness, injury, or disability. As a rule, it can provide a non-taxable benefit of 66% of your gross income each month. A problem can arise if you are either:  An employed person who earns a lot of commission or bonus as a percentage of their overall income.  A self-employed person. Both types of worker need to check the Terms & Conditions or the ‘small print’ of the PHI contract they are in, or looking to arrange. A good example of this was a potential Client I visited last week. He is a Director of his own small plumbing company. The surprise to him was that his Accountant, doing a fine and legal job to minimise his ‘earnings’...and therefore his tax bill...could make a PHI policy useless to him. The point I made to him was that it is all well and good saying that you earn £30,000 per annum and taking out a PHI policy giving this benefit, but no good if your accountant can only prove taxable earnings of, say, £15,000 were you to make a claim. This could be food for thought. After all, when did an insurer ever just ‘take your word for it’?! Similar logic applies to Mortgage Protection plans that may have been sold to you (perhaps by a Bank). If you are Self-employed, make sure your policy does not cover redundancy (unless a joint policy where the other person is employed and has 100% of the redundancy benefit). The simple reason is how can a Self-employed person be made redundant? I am sure we would all be surprised with how many policies like this...which are useless due to initial mis-selling or subsequent lack of review over the years...are in force and in people’s ‘filing system’ at home. So, understand the advice you are being given and policy you are taking out before parting month-in, month-out with your hard-earned money. Then, as the years pass and your circumstances likely change, make sure you review your protection policies for being of continuing viability and real benefit to you. Sermon over! Until next time...